Getting paid fully and on time is a big challenge in the construction industry. In fact, most contractors struggle with getting timely payments for the materials they furnish and the services they render.
The problem lies in the fundamental structure of construction projects. A single project is composed of several contracts that are signed and agreed on by different stakeholders. These stakeholders have a hierarchy of payment accountabilities starting from the top of the chain (the property owner or general contractor) to the lower-tier parties (contractors, subcontractors and suppliers).
The standard payment practice involves a retainage where a percentage of the total payment is paid upfront while the rest is given after job milestones or when the work is completed. When one party deems the other did not fulfill their contractual obligations, they may withhold payment. This may result in a domino effect where a contractor that does not get paid will likewise withhold payment from their subcontractors and so on.
Contractors need to be diligent to protect their right to file a mechanics lien: a legal claim attached to a property to seek compensation for unpaid work on it. Protecting this right starts with serving a preliminary notice. A preliminary notice notifies the property owner of a contractor’s participation in a construction project and serves as a reminder that they will exercise their lien rights in case they do not get paid for their work.
To file a mechanics lien, construction businesses need to be careful not to commit errors in serving a preliminary notice. Here are some common but fatal preliminary notice mistakes construction businesses need to know.
1. Failing to serve the preliminary notice before the deadline
Many states are strict with their deadline for sending a preliminary notice. Once a contractor misses the deadline, it may lose its right to file a lien for a specific timeframe in which the contractor provided materials and labor.
In California, for example, contractors are required to serve a preliminary notice within 20 calendar days of the first date they rendered services or furnished supplies. If the contractor started work on a project on Jan. 1, then they must serve the preliminary notice on or before Jan. 21. If the preliminary notice was served after the Jan. 21 deadline, then the contractor will be entitled to file a lien only for work performed within the 20 days before serving the notice.
Many states have their own deadlines so contractors need to review state laws to ensure compliance. It is always a good practice to serve the preliminary notice as soon as the agreement to provide labor or materials is in place.
2. Failing to include all the required information in the form
Aside from the deadlines, many states also have strict requirements when it comes to the format for the preliminary notice and the information included in it. Being careless with the information, especially the estimated amount of services, can lead to other parties contesting the claim and render the mechanics lien invalid. Some states even require specific font types and sizes as well as statements to be included in the form.
Again, contractors should always consult laws regarding states’ specific preliminary notice formats to eliminate any risk that will result in an unenforceable lien. In addition, always list the proper dollar amount of the contract, no more, no less.
3. Failing to serve the preliminary notice the correct way
Another aspect of serving the preliminary notice that can affect the enforceability of a lien is the method of delivery. Many states require preliminary notices to be sent via personal delivery, certified mail with return receipt requested, registered mail or online platforms.
It is always advisable to keep proof of delivery to the intended parties. These are usually return receipts, post office invoices, and other documents that show the delivery of notice. Misplacing these documents can lead to the mechanics lien being contested on the grounds that the contractor is unable to prove it has complied with the state’s requirements.
The importance of filing a preliminary notice cannot be overstated as it is the difference between protecting a contractor’s right to file a lien and voiding it. Review state laws and take careful note of important dates and requirements to ensure that a valid preliminary notice is filed.
